What is blockchain technology? Blockchains are decentralized and immutable digital databases. These distributed ledgers record transactions across multiple computers, enabling transparent exchange of assets without intermediaries.
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A blockchain is a digital ledger that records transactions in a decentralized and transparent manner. It is a database distributed across a network of computers, with each computer possessing a copy of the database. The data in the blockchain is stored in blocks, and each block contains a series of transactions. Once a block is added to the blockchain, it can no longer be changed or deleted, making the blockchain immutable.
Blocks are added according to a set of specific rules (known as a consensus algorithm). This allows networks of decentralized physical computers working together to form a single virtual computer.
What sets the blockchain apart from other computer networks is its permissionless nature. Any computer can become part of this larger virtual computer as long as it adheres to the consensus process. In a blockchain, the blocks themselves can be thought of as the computer’s hard drive. A block is a record that holds new transactions. Once a block is completed, it is added to the chain. The consensus algorithm can be likened to an operating system (Windows or MacOS), and the peer-to-peer network is comparable to the silicon semiconductor circuits that transfer data between different parts of a computer. The key features of blockchain technology can be defined as follows:
Decentralization
No single entity has control over the database
Transparency
Each transaction is visible to all participants of the network
Security
Uses advanced cryptographic computer algorithms
Functionality of the blockchain
One significant difference between a typical database and a blockchain is how the data is structured. A blockchain gathers information into groups, also called blocks, which contain information. Blocks have specific storage capacities and, when filled, they are appended to the previous block. This creates a chain of data known as a “blockchain.”
A database structures its data in tables, while a blockchain – as the name suggests – structures its data into groups (blocks) that are linked together. Thus, all blockchains are databases, but not all databases are blockchains. This decentralized system generates an irreversible data history. Once a block is filled, it is set in stone and becomes part of this unchangeable timeline. Each block in the chain is also timestamped precisely when added to the chain.
Decentralized structure
One of the main advantages of blockchain technology is decentralization. Conventional databases are centralized, meaning they are controlled by a single entity such as a bank or a government. In contrast, decentralized databases are distributed across a network of computers, and no individual entity has control over the database. This makes the database more secure and less susceptible to hacker attacks or privacy breaches.
New information added to the blockchain in the form of blocks is constantly synchronized with the database, which is stored at multiple locations and updated at intervals. All records in this database are public and verifiable. There is no central location for a blockchain. Therefore, the system is difficult to manipulate since all information exists simultaneously at a variety of locations.
“Imagine a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update the spreadsheet. That’s a basic understanding of blockchain technology.” – Ameer Rosic, Blockgeeks
Unlike a traditional computer, a blockchain network can offer strong guarantees of trust based on the cryptographic and game-theoretical properties of the system. For instance, a user or developer can trust that code executed on a blockchain computer will continue to behave as intended. This holds true even when individual computers in the network attempt to undermine the system. Thus, a blockchain network enables disintermediated peer-to-peer interactions and digital services owned by communities rather than companies.
Blockchain technology uses cryptographic algorithms to ensure the security and integrity of data. Each block in the blockchain contains a unique cryptographic hash generated based on the data in the block. This hash links the block to the previous block in the blockchain, creating a chain of interconnected blocks. This process of linking blocks creates a permanent and immutable record of transactions.
Advantages compared to ordinary databases:
- Peer-to-Peer – The blockchain enables direct transactions among participants without the need for a third party to interpose.
- Distributed database – Each participant in the network always has a synchronized, updated version of all transaction data.
- Tamper-Proof – Integrity is ensured through numerous nodes on the network that independently validate all transactions.
- Fail-Safe – Redundant storage at all network participants protects against failures and data loss.
Disadvantages compared to ordinary databases:
- Effort – Integration into existing IT landscapes as complex due to the young technology.
- Efficiency – Database queries and transactions take more time and are more complex than with centralized services.
- Consensus problems – If there is no consensus in public blockchain networks, forks can occur.
- 51% attacks – If one party can claim 51% of the computing power, it can create its own transaction histories.
- Privacy – Transparency can also be detrimental to certain schemes as all participants know every transaction and all holdings.
Challenges of blockchain technology
Scalability: One of the biggest challenges of blockchain technology is its scalability. As the blockchain grows larger, more time and resources are required to process transactions. This can make the use of the blockchain slow and expensive, especially for applications that require a high volume of transactions.
Interoperability: Another challenge of blockchain technology is interoperability. There are many different blockchain platforms and protocols, and they are not always compatible with each other. This can make the transfer of data and value between different blockchains more difficult.
Regulation and Acceptance: Blockchain technology is still in its infancy, and there are many challenges in terms of regulation and adoption that need to be overcome. Governments and regulatory bodies are still grappling with how to regulate blockchain technology, and many companies and organizations are hesitant to adopt it due to concerns about security, scalability, and interoperability.
Use cases of blockchain
The blockchain is already being utilized in many areas. a distinction can be made between closed and open systems. While cryptocurrencies primarily operate on open systems, some companies have internal blockchain systems in operation. As blockchain technology matures and evolves, it is highly likely to be increasingly employed and integrated in various industries and applications.
The areas of application are extensive and mainly occur in fields where the attributes of tamper-proof transparency are required. This requirement can be significant in sectors such as logistics, supply chains, administration, and of course, the financial sector. Proposed as a research project in 1991, the concept of “blockchain” has now reached its late twenties. Over the last two decades, the technology has garnered a considerable amount of public attention. Companies worldwide are elucidating what the technology is capable of and where it will evolve in the coming years.
With many practical applications, blockchain technology is now receiving global attention, not least because of Bitcoin and cryptocurrencies. As a buzzword on every investor’s lips, blockchain aims to make business and government operations more precise, efficient, secure, and cost-effective by reducing intermediaries. As we prepare for the third decade of blockchain, it’s no longer a matter of “if,” but “when” established companies will embrace the technology. The functions that blockchain can already assume in our daily lives are evident in our coverage of the subject.
Summary
- A blockchain is a decentralized digital ledger that transparently and immutably records transactions. It operates through a network of computers, each of which holds a copy of the database in blocks and adds new blocks based on specific consensus rules.
- A fundamental difference between a conventional database and a blockchain lies in how the data is structured. While a database organizes information into tables, a blockchain groups data into blocks that are linked together, forming an immutable chain of data. Each block has a specific capacity and is appended to the previous one, creating a decentralized system with an irreversible data history.
- The primary advantage of blockchain technology is decentralization. Unlike traditional databases controlled by a single entity, decentralized databases are distributed across a network of computers, making them more secure and resistant to attacks. The continuous synchronization and public verifiability of blockchain records stored in multiple locations prevent manipulation and offer strong trust guarantees based on cryptographic properties.
- Challenges for blockchain technology include scalability, as decentralized databases become slower and more costly with increasing size, and the lack of interoperability hampers seamless data and asset transfer between different platforms. Regulatory uncertainty also contributes to companies' cautious approach.
- Blockchain technology is already being used in various areas, from cryptocurrencies to logistics and finance. As the technology matures, its acceptance and integration are expected to increase. The technology has the potential to revolutionize various business processes and ensure tamper-proof transparency.
